Europe Must Rethink the Digital Services Act

Originally published by The Mace (30 June 2021).

The European Commission claims that the Digital Services Act (DSA) will deliver much-needed harmonisation and clarity of regulation. In fact, it introduces new risks and costs on businesses without adequate justification. If the European Commission aims to improve the competitiveness of Europe’s digital economy and to safeguard the interests of European consumers, its proposals must be significantly amended.

A Blow for Small Business

A good illustration of how the DSA lacks a basis in sound evidence is the new compulsory “out-of-court dispute settlement” mechanism for users of online platforms. The fees for such dispute settlement would be covered by online platforms if they lose, and the platforms will not be able to recover their own costs – even if they win. In its DSA Impact Assessment, the European Commission did not even attempt to calculate the burdens that this might impose, especially on medium-sized enterprises. Even “good faith” disputes could escalate to the point of becoming an unsustainable burden for anyone other than the largest players.

Although the DSA excludes small and microenterprises from this particular mechanism, it still requires any company with a turnover above €50 million or balance sheet above €43 million would be caught out. Many online platforms, especially startups, operate with very small or negative profit margins. Hence, a startup with a turnover of €50 million, but low or no profits and low reserves, could be bankrupted by having to incur the high costs of a dispute settlement. What’s more, this could occur even if the startup wins a dispute.

European Parliament: Worse, Not Better

The European Parliament will now play a significant role in improving the DSA. Unfortunately, the draft report of the European Parliament’s Internal Market and Consumer Protection Committee (IMCO), shows that the rapporteur — Christel Schaldemose (of the Social Democrats) — wants to push even further than the Commission in a direction that will stifle innovation and threaten the fundamental freedoms of Europeans. 

Schadelmose proposed removing the exemption for small and micro enterprises from the provisions of Section 3, including the article on out-of-court dispute settlements. On that proposal, even the smallest startup would have to incur costs of dispute settlement if it is flooded with disputes as a part of a campaign to bankrupt the business.

Risks to Fundamental Freedoms

While imposing burdens on businesses, the DSA also threatens freedoms protected by the EU Charter – especially freedom of expression and freedom of association. A key example of that is the provision on extra-territorial takedown orders by administrative authorities.

The DSA will require providers to obey “orders to act against illegal content” issued by national authorities. Instead of decisions around constitutes illegal content being decided by courts whose effect remains within the boundaries of the domestic jurisdiction, the DSA allows member states to designate “administrative authorities” with powers to issue such orders. The DSA also allows for orders to have extra-territorial scope. 

This practically guarantees that national administrative agencies will apply their restrictive national rules on speech and demand removal of content in other EU member states, even if such demands are unconstitutional in some other countries. Such demands may violate the safeguards provided by the DSA, but the very considerable burden of resisting an unlawful order will be entirely on the providers – and they will often simply acquiesce.

The Problem with “regulate first, ask questions later” 

The DSA and the Schadelmose report are to a worrying extent a reflection of the seemingly common belief that ‘something must be done’ about the unsavory practices that can occur online. This belief cannot be a license to regulate without solid evidence. The European legislature should remember that although problems exist, the law is not necessarily able to proportionately address them.

The DSA is an important opportunity to protect the competitiveness and integrity of the European internal market as well as to uphold the EU Charter of Fundamental Rights, which is threatened by the growing complexity of special EU and national laws applicable to digital services. 

The co-legislature should make the best of that opportunity.